ClearSign Technologies Corporation (CLIR) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the ClearSign Combustion Corporation Third Quarter 2015 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to our moderator Matt Selinger, please go ahead.

Greetings and welcome to ClearSign Combustion Corporation's third quarter 2015 results conference call. During the course of this conference call, the Company will make forward-looking statements. We caution you that any statement that’s not a statement of historical fact is a forward-looking statement. This includes remarks about the company’s projections, expectations, plans, beliefs, and prospects. These statements are based on judgments and analyses as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties associated with the forward-looking statements made in this conference call are described in ClearSign's public periodic filings with the SEC, including the discussion in the Risk Factors section of the 2014 Annual Report and on Form 10-K. Investors or potential investors should read these risks. ClearSign assumes no responsibility to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. On the call will be Steve Pirnat, Chairman and CEO of ClearSign Combustion Corporation, and Jim Harmon, Chief Financial Officer. With that, I will turn the call over now to Jim. Jim?

Thank you everyone for joining us this afternoon. Before I turn the call over to Steve, I would like to review our results for the quarter as they they've been reported on our 10-Q and this afternoon's press release. For the third quarter of 2015, we recorded a loss of $1,961,000, compared with a loss of $1,721,000 in the third quarter of 2014, an increase of $240,000. This increased loss was primarily due to our field testing and development efforts of our Duplex Technology. As to our cash resources, we had $12.9 million of cash at quarter-end and our cash balance decreased by $1.9 million in the third quarter. As such, you can see that we have about seven quarters of cash on hand based on our current rate of usage and without considering any income from sales. We currently have six field test projects regarding our Duplex Technology. Two related to once-through steam generators in the enhanced oil recovery industry, and four related to process heaters in the oil refining industry. Three of these projects are in a design phase and three are in the field work stage. Our field work has been successful to date in registering NOx emission levels within the customer and relevant regulatory body and specifications. However, as Steve will elaborate upon there remains certain additional field work required before we can complete the installation and commissioning process, receive payment, and record the revenue. As I stated in last quarter’s call, these field trials often times include payments once the project is completed and the installed unit is operating to the customer satisfaction. As each of these trials are completed, we expect to recognize small amounts of revenue. As we move forward with commercial sales of Duplex, we would anticipate more traditional sales terms, but would still recognize the revenue once we are assured of customer acceptance. Our business plan contemplates licensing our technology after we prove commercial viability and generate interest from OEMs. Licensing would significantly change the makeup of our revenue mix, revenue recognition and margin. While we are currently pursuing various licensing arrangements, we have no agreements at this time. Naturally, we anticipate that each step of the development of Duplex, the completion of sales, and increased end user pole will enhance our ability to license our technology. With that, I'll turn the call over to Steve.

Thank you Jim for providing some color to our reported results. We spent some time on the last call describing our target markets and the sales cycle in which we work. I think it may make sense to briefly reiterate some comments on our target markets, market drivers, and then talk a bit about installation and engineering process on this call. I think this will give us perspective on our road to commercialization and market penetration. We try to be transparent as possible in discussing our product development and customers. However, due to sensitivities that surround our customers and business there are times that we may need to balance investor transparency with discretion. We are dealing with large operations in our target markets, some of our current and future customers do not want their business and operations discussed in detail for competitive, regulatory, and financial reasons. At times you’re able to discuss more about our technology results when the client is not named. Therefore you will notice that we will at times discuss customer and products were generically then in the past. This is also true for discussions regarding our pipeline. We would not want to give away any negotiating or competitive advantages by naming potential customers. ClearSign Technology is focused on improving key performance characteristics of combustion systems, including emissions control, operational performance, energy efficiency, and overall cost-effectiveness. Our technology is focused on process heaters, furnaces, boilers, which account for two-thirds of the energy used in U.S. manufacturing. Currently, we are actively pursuing the commercialization of our technology in three target industrial segments, enhanced oil recovery, refinery and petrochemical, and steam generators, boilers. First, you may have heard us mention once-through steam generators or OTSGs during our presentations and calls. These very large steam generators used for enhanced oil recovery, generally between 25 million and 85 million BTUs per hour in the United States, and up to 250 BTUs an hour in Canada. Our Duplex technology is being field tested and now used in day-to-day operations in California's San Joaquin Valley with their over 700 once through steam generators and around 300 more and larger steam generators used in the oil sands of Northern Alberta. Our second target relates to process heaters in the oil refinery business. There are over 7000 refineries worldwide, a 140 of which are located in the United States and each refinery has on average approximately 20 of these heaters. This represents a total addressable market of more than 14,000 heaters. We are working with four refineries including Tesoro Delek US Holdings and we are currently in the field installing technology in one of the Southern California Refineries. Another application we are focused on is commercial boilers. We believe that there are approximately 300,000 commercial boilers in the United States alone, used to generate steam for manufacturing office buildings, hospitals, and schools. We are talking to a number of commercial boiler manufacturers and are in different phases of discussion and test with them. Ultimately, look to enter into a licensing arrangement of which Jim alluded to earlier. In the quarter, we announced that we have entered into agreement with Tesoro to evaluate the performance of our technology at one of their Southern California refineries. Additionally, we reported encouraging preliminary results as another refinery operator on our field test installation list and weeks ago announced an installation with Delek USA Holdings for process optimization. This latest agreement was not only our fourth major refinery customer, but what is more important here is that the impetus from the customer was different from the previously announced customers. Delek expressed interest in ClearSign signs unique patent pending Duplex technology because it will eliminate potential flame infringement upon process tubes and reduce maintenance cost and downtime from [indiscernible]. Shutdown and maintenance cost are quite substantial for refineries and the more they can keep running, the more economically beneficial the solution becomes for them. Like many of our initial customers, Delek has indicated an interest in retrofitting Duplex technology into other processes heaters, if the initial trial proves viable and the ClearSign value proposition is confirmed. This market continues to validate that our Duplex technology appeals to operators due to lower emissions and operational efficiencies through lower field cost and/or reduced downtime for maintenance. These operational efficiencies become more important in times of lower oil prices. While crude oil prices have decreased significantly usage and utility of refineries have remained quite strong. Also cost cutting improved efficiencies are always in favor in the American industries. They garner more attraction particularly in times of stressed earnings. Operators in all three of our target markets are under the under an intense pressure to meet current and proposed federal states and local emission standards. Companies are facing substantial signs for non-compliance. When you look at our duplex technology it is simple and elegant solution that it is uniquely cost-effective. It is important to highlight that Duplex technology is the only pollution control technology available on the market that actually increases operational efficiencies, thus driving down cost and becoming a payback solution on selective applications. The South Coast air quality Management District, which covers the greater Los Angeles Area has proposed NOx emissions reductions by 50% levels by 2020 under their NOx reclamation program. ClearSign has presented our Duplex technology to the South Coast Air Quality Management District as part of their evaluation of potential technology solutions to reduce NOx emissions to these aggressive new levels. Now, I would like to take some time and talk a bit about implementation and/or rollout of our technology with our customers. We spent some time on the last call highlighting the sales cycle that we worked within. We are dealing with large operators who are cautious about these technologies companies that want validation at the technology works. Frankly, nobody ever wants to be first despite the value of the technology. Once we convince the customer to use a technology we need to work our way through the corporate structure and even get built into the schedule when there is a shutdown so that we can engineer and install our technology. These installations, each installation is different and requires customer engineering as most are retrofits. For instance, the California refinery involves a multi-burn vertical cylindrical production process heater. The OTSG involves a large horizontal burns. ClearSign has developed a very effective and productive collaboration among our various clients within the enhanced oil recovery, refinery, and boiler industry. In constant with these clients, we continue to gain operational and applications insight that we have led to a variety of product improvements and we are incorporating these enhancements to future improvements to help increase reliability, safety, and operability of our duplex technology in order to build a truly world-class platform. This is our evolutionary process for our initial installations. We are up and running providing great results. We continue to take steps with our customers to optimize these installations. As Jim mentioned in his comments, there are two stages to installation, design and field work. The latter phase is ongoing for some time and is in the process of fine tuning when both the customer and our engineers are satisfied that we have optimized performance the installation will be completed. Then as we move forward, we take advantage of this knowledge and our installations will become more effective as we gain more applications knowledge. They will become more standardized versus custom. I want to make it clear that we are not experimenting but commercializing installations and fine tuning applications as we go. These will pave the way for large scalable rollouts. As I mentioned above, we have been happy to report that our technology has performed extremely well in these trials with multiple customers. For example, the once-through steam generator unit operating in Southern California has been operating at a high firing rate and providing sub-5 ppm NOx while maintaining steam capacity and quality. This demonstrates that Duplex Technology can and does meet the regulatory requirements of 5 ppm NOx in the San Joaquin Valley which is among the most stringent in the world but even more significantly we were able to show a meaningful reduction in energy consumption. Specifically, we demonstrated an efficiency improvement of up to 4% due to Duplex Technology's superior and radiant heat transfer characteristics combined with the elimination of flue gas recirculation and the associated blower horsepower. With a 4% energy improvement end users could experience a return on their environmental investment of two to three years in some cases. With that said, let me move into a discussion of our pipeline. Early in the quarter, we announced an agreement with Tesoro to retrofit a multiple burner refinery heater in the Los Angeles area. In the initial stages of this agreement, several performance criteria are being evaluated including NOx submissions that can meet or exceed California’s South Coast Air Quality Management District's ambitious NOx Reclamation Program's goal of reducing refinery NOx emissions to half of their current level by 2020. A little over a month ago, we were awarded an initial commercial order from our original OTSG demonstration customer resulting from the positive results from the trial tests. We really feel that this was an inflection point in the growth of our company as upstream oil and gas operators are adopting our technology based on the validation of the environmental and economic benefits associated with it. This is part of the previous agreement which includes time sensitive pricing delivery and installation terms that if elected will apply to future purchases by this customer. Under this initial purchase order, Duplex will be retrofitted into a second once-through steam generator used for thermally enhanced oil recovery. I touched on the agreement with the refiner Delek USA Holdings in my earlier comments. In this agreement, ClearSign will retrofit burners within a process heater at Delek's 75,000-barrel a day refinery in Tyler, Texas. It is notable that this marks ClearSign's entrance into the Texas market and the company’s fourth major refinery customer in recent months. The goal is to eliminate potential flame impingements upon the process tubes and reduce maintenance and downtime costs. Delek has expressed interest in retrofitting the Duplex technology into other process heaters if the initial installation proves the viability of ClearSign’s solution. Regarding the development of our Electrodynamic Combustion Control or ECC technology, we have made some steps forward in this lab this quarter. However, the results are still too preliminary for us to draw any conclusions. So sufficient to say that our lab testing is ongoing for this technology and that we believe it is well suited for solid fuels like coal, a massive addressable market die or need [ph] of an environmental solution. Now, let’s shift our overview to corporate activities. As Jim mentioned in his comments, we believe we are adequately capitalized to support our current development and commercial ramp up for our technologies. Our main focus is on the successful completion of field installations to build a book of business and lay the groundwork to move from product development to sales technology licensing. After that, we will be better able to assess our future capital needs if any and to consider our strategic alternatives. In anticipation of increased demand for our demonstration installations and customer orders, we promoted Dr. Roberto Ruiz to the position of Chief Operating Officer. Previously, Dr. Ruiz was ClearSign’s Senior Vice President of Product Development. Dr. Ruiz is a well respected combustion industry veteran with leadership experience at companies including OnQuest, John Zink and the Gas Research Institute. In his new role, Dr. Ruiz will lead ClearSign's growing project management and field engineering functions at our recently opened office in Tulsa, Oklahoma. Tulsa is the largest industrial cluster for traditional industrial combustion in the United States in a place where we wanted the presence. In closing, we often ask about macro conditions that affect our business and the lot of focus on the price of oil. Oil as a commodity affects many industries and may distract to a delayed decision making in our focus markets. Since our solutions can appeal to operators for emissions regulations, fuel efficiency and operational efficiencies through lower maintenance, we feel we have quite a competing solution. That said, as a priority shift what does change is that if in regards to the scheme of things not to win, one point to remember here is that the drive for clean air and cross cutting are not going away and that no matter what the price of oil our customers will have to comply with environmental regulations. The ability to reduce emissions and possibly reduce energy consumption is a win for both the customer and the environment and a strong indicator that our game changing technology will gain traction within our target markets in the long term. Before I move on to questions, I would like to thank our investors for their time, investment and support of our game changing technology and team. At this point, I would be pleased to answer some questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from [indiscernible]. Please go ahead.

Hi, Steve.

Hi, Robert.

I wanted to ask you about the other emissions. Carbon monoxide, sulphur dioxides, are those noticeably reduce from the technology? I know NOx is apparently the big measuring stick but I just was wondering those are other pollutants I think. Could you speak to that some?

Yes, certainly carbon dioxide and carbon monoxide are reduced and are also key to environmental gases that are regulated. Sulphur dioxide tend to be a little more appropriate around coal-fired applications and the trust of the technology for Duplex is around gas.

Okay. And just for the record, I’m probably the closest person on the call to Tyler. So like you to see you guys at the streets out here.

Yes, I’ve been there a couple of times and it’s only actually I’m sitting in Tulsa so it’s only about four and a half hours by car from our office in Tulsa.

Yes. I’m about 45 minutes away from Tyler. And then one of the thing, when you were talking about the savings for the customers as for as fuel, you said approximately 4%, is that what you are – are you mentioning that also because it can help the customer overcome the cost that they may already have in the FCR installation that they may have in the plan already?

Yes, again that 4% number was developed specifically in collaboration with one of our customers on a once-through steam generator. So it was the result of eliminating the need for flue gas recirculation, the fan horsepower associated with that and then of course the radiant heat transfer elements of the Duplex Technology lend to more efficiently transfer. So it’s not all installations, the amount of fuel savings that you see would very much depend on the nature of the application but specifically with regards to once-through steam generators and the enhanced oil recovery market was the price of oil falling those operators are under increased pressure to not only reduce emissions but also to try to reduce operating cost. So the ability as demonstrated in this one specific site to reduce energy consumption is an attractive attribute to the technology to customers who A) have to reduce emissions and B) want to save money.

Okay. And then the process heaters I think was what you were emphasizing in this last most recent Tyler application. Is that going to be – I guess I’m just trying to understand this equipment because I don’t really see it but process heaters and there is return thousand of them, is this going to prove or help prove in a different way compared to the other application or mentioned in the other releases.

Yes, the initial installations on the once-through steam generators prove that conceptually the Duplex Technology would produce very low emissions and as well as the other attributes. But each application whether it’s a steam boiler or a refinery has certain idiosyncrasies and nuances to it that the operators themselves want to validate through field installations. So a refinery operator who is operating a refinery process heater which tend to be smaller, when I say smaller 5,000 and 10,000 BTU in our boilers that are firing upwards don’t necessarily look at one 60,000 BTU an hour boiler firing horizontal and say okay if it works there, it will work everywhere. They really want to see specificity around our ability to demonstrate technology in an absolute application. And then you get into different issues with respect to how the refinery operator operates which could really be certainly would enjoy having another conversation with it to subject but for example once-through steam generators tend to burn a lot of natural gas on a consistent basis. In refinery heaters, for various reasons, you can get swings of fuel and get a lot of hydrogen and that hydrogen needs to in some cases on more traditional low NOx burners, problems with flash backs that become problematic on other level. So our ability to demonstrate in our laboratory first and now in the field the efficacy of this technology has really been quite important. And as we get more and more installations, people would keep asking me how many and I wish the answer was four probably a few more than that. I think the industry will see multiple installations in these applications as validation of the technology works on a broad basis and that would give us access to those 14,000 heaters I referred to in the refinery petrochemical business.

Okay. Thank you very much.

Thank you.

Our next question is from Lou Basenese of Disruptive Tech Research. Please go ahead.

Hi, Steve and Jim, thanks for taking my questions.

Yes. Hi, Lou.

Just on the revenue recognition, I know you guys provided some clarity there on how it’s going to be done but any timeline you can give when you might start recognizing some of that revenue from the deals that are in the backlog just as installations.

We expect that there might be a modest, underline the modest, amount of revenue recognized in the fourth quarter and then somewhat of a ramp up in 2016 but again I want to emphasize the modest. We look at the installation and application and validation of our technology and the number of installations that we can use to validate this is really is a surrogate for success in the short term, not the magnitude of the order. And the more customers that are using the technology successfully in the longer period of time by which they operate successfully will really build a long term business value and…

Okay. Along those lines now that the tech’s been validated in operation for over a year or so with Aera, are you at the point with other customers where you’re talking about larger potential orders out of the gate or is it still handful at a time or any color you can provide there?

Well the answer is yes and it’s still a handful at a time. And again there has been – it’s kind of an inflection point in the momentum with this market which has been principally based on the reduction in oil prices but nevertheless the environmental regulation still persist. And so to give you a specific answer, yes, we have ongoing discussions and proposals out to a variety of once-through steam generators both in the U.S. and Canada. And Lou, we remain optimistic that this stuff is going to close into demonstration orders and then actual contracts, but we’ve been pretty bad at predicting the quarter. So as I’ve said on a couple of occasions, it’s in our best interest and I think our investors best interest for us to announce results when they occur not when we think they might occur.

Understood. And then just one last question quick, I think you mentioned in the prepared remarks one of the motivations for Delek choosing the Duplex was to avoid unnecessary shutdowns at the refinery. Can you just give us an idea of what that cost would be associated with the shutdown at a refiner, maybe what that cost is per day an estimate just to get an idea how much savings that they may realize?

Again, I recall that once - a while ago they told us and they asked us not to necessarily disclose that for a variety of reasons. But as you can imagine, the shutting down a heater in a refinery is significant.

Okay. I mean six figure, seven figure significant or…

It’s more than overwhelms the cost of the burners.

Okay. All right, thanks. I appreciate it. I’ll jump back in the queue if there are any other questions.

It again depends on planned infringement occurs on a lot of heaters in a refinery, Lou and some heaters are really a bottleneck to the whole refinery and some heaters are just an inconvenience. So the impact of flame infringement and the economics associated with it, really a good number is going to be specific to the actual heater and the actual refinery.

Okay, makes sense. Thanks.

[Operator Instructions] Our next question is from Jason Cavalier, a private investor. Please go ahead.

Hey, Steve, thanks for taking my questions. So in your press release, you reference a retrofit once-through steam generator on a second unit, is that a new order that has not been disclosed and is coming to life for the first time in this press release?

No, the order had been disclosed I believe in our prior press release, but it is an add-on to really a trial order we had and for us the most significant thing about it is while the initial trial is still under evaluation by the client, it shows level of confidence and it is certainly encouraging from our perspective that people want to continue to pursue the technology.

That's fantastic. And maybe for the benefit of the group including me, I know that there is a pretty rigorous and very, very time-consuming regulatory process that one of these customers might have to go through, can you shed some light on what that process typically looks like if they’re interested in your technology for some of their respective equipment?

They - I’m oversimplifying this by a lot, but they have to apply for a permit and in some cases it would be considered an experimental permit and then they have to put the technology in the field and demonstrate that it works and then in collaboration with the client the end user, the regulators say yeah this is a solid technology and we will accept it as an alternative to something else like selective cattle catalytic reduction systems.

So, my next question is, you’ve mentioned now on a handful of these conference calls the Tar Sands and different opportunities in Canada would you say that you’re closer to announcing something in that part of the geography then say you were a quarter ago and how bullish are you on the refiners and other operators in that part of the world with regards to your technology?

Well to be specific we've had some ongoing and subs substantive dialogue three of four major enhanced oil recovery operators in Western Canada not necessarily Tar Sands, but heavy oil with accrued and there was the drop in oil price and there was a change in the political environment in Western Canada. So there was little bit in my view a pause in decision-making with the respect to moving forward with some of these projects, but more recently and I’m saying more recently is, last week we've been encouraged to update our proposals and get back up to Canada and start talking again. Again and I'm not trying to be vague for purposes of being vague, but a lot of these guys are negotiating with us and they are negotiating with the regulators. So, they make the point what they tell us they would like to stay between us and them and I have to respect that.

You commented you made a comment with regard to strategic alternatives that you might evaluate sometime down the road and is there anything you can add around why you picked those two words to describe what ClearSign might contemplate?

Well I just think it is best described describes the wide range of optionality we have going down the road, both in terms of licensing or subcontracting or even financing.

And my last question is, we hear I think collectively as an investor group that there has been a fair amount of analysis and due diligence done on the patent portfolio, is there any commentary that you can share with what that outcome look like or what level of comfort say you and your leadership team now have versus prior to the analysis?

Well nothing I can share at this point, but to your point there has been another independent analysis done and I would say I’m more confident than now than I was before because two sets of eyes are better than one.

Well thank you very much. Those are all my questions.

Yeah, thank you.

Our next question is from John Mayer a Private Investor, please go ahead.

Good afternoon Steve. I have one question for you today and the question is, obviously and understandably everyone, every potential client here wants to validate the technology and make sure that it works from their perspective, given that can you give us some feeling, some perspective on how long it takes for them to validate and to the point where they are comfortable that it works, the technology works?

Yeah, I mean, again this range it varies by the oil companies themselves. You know, the super majors, the large integrated worldwide oil companies, you know a year is, or more could be typical. Some of the smaller refineries that we're working with now, I think if they had the system up and running completely to their satisfaction for six months they’d be convinced. And to the degree that we've had success, we've had success working with some of the smaller refiners who have compelling economic need for our technology and our, say more willing to take “a risk” and they really helped us prove the technology works. All of these refiners belong to the American Petroleum Institute and other trade and technical Association. So they do active actively share knowledge and in addition we get a lot of favorable support from the environmental regulators, particularly South Coast Air Quality Management District and it is again one of the situation now where, I think where kind of at the inflection point where we've got enough stuff and the field and when we get it up and running and these other projects that we are working on get up and running we’ll have reached their critical mass, where it won't be as great a concern as it is perhaps today. But to make sure the business, I frankly I applaud the industry for being diligent and thorough, we’re talking about refineries and environmental is important part, but for safety and operability you're also important components of any equipment you put into refinery. And in general we've been very pleased with the collaborative relationship we've been able to develop with our partners and the kind of joint learning’s that we've developed and some of the things that we've got in the field, we've made modifications to evolve it, not that what we've put in wasn't any good, but the customer himself had ideas and how we could make it a lot better and we thought why not do it, you know.

Thank you.

[Operator Instructions] Our next question is from Rishi Jain of Cross River Advisors, please go ahead.

Hi Steve thanks for taking my call here. I just wanted to suggest, I mean I think as an investor group we understand that this is a slow-moving, all of these industries are slow moving and so we applaud the commercial progress and moving us out of the lab and that's great and I think we’re, all on board we’re are being conservative with the PRs, what I would such as though and what I find troubling is that we have not seen any insider buying from the management team in a long time, yourself included, and I would strongly suggest that a lot of different investors have come to me and in dialogues have asked why this has not happened. I understand that there are windows of opportunity and that lawyers will always said no don't do it, but I do want to register that we would very much like to see this as a mark of confidence given that it is difficult to get these PRs going wherever you can, move people along these utilities in such - beyond their own pace. So, I just wanted to just let you know that.

Well that wasn't the question, but it was a comment and I appreciate it.

Okay, thank you Steve.

Showing no further questions. This concludes the question-and-answer session. I’d like to turn the conference back over to Mr. Pirnat for any closing remarks.

Again, I would like to thank the participants for your interest in ClearSign and look forward to speaking to you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.